Glad you're not affected by the USA mortgage meltdown? Think again!!

Are you worried because of all the instability in the U.S banking system? The sub prime melt down, foreclosures and the long list of banks closing their doors. Do you think that we are immune up here in Canada? Well we are and we aren’t, let me explain. 

Well thanks to the fact that our banks have large national branch networks, rather than where our American neighbor’s banks are mostly regional focused. We have deposit insurance (provided by CDIC) as do our American friend’s (FDIC), however that will not help the over 10,000 clients of Indy Mac Bank who have deposits or investments in excess of the insured limits. Our strength truly lies in our limited number of charted banks and our national network. 

Have there been effects here in Canada, yes there have. Just in the past year alone, several of our key alternative or sub prime lenders have either scaled back, pulled out or shut down entirely. Here is a short list and it is by no means complete, GMAC, Accredited Home Lenders, Money Connect, Xceed and just recently the involvement of our federal government pulling 40 amortization’s and dropping the 100% financing.

Now have we ever had a bank failure here in Canada? Yes we have had many, CDIC’s own website list’s at least 43 examples since 1970 but none since 1986! Even during the great depression when most of the U.S banks were closing their doors our banking institutions remained mostly intact. 


O.K, Here are the 3 things you must do to protect yourself financially!

1) Know how much CDIC will insure you for in the event of a failure? Don’t get caught not knowing!

2) If you bank with one of the big 5 charted banks, your chance of experiencing a failure is fairly slim to none. 

3) If you mortgage bank fails, keep making your mortgage payments. The loans that are on the books will be bought by another lender. Just because the above lender is no longer lending does not mean that you can get off scott free.

The fact is we’re living in a crisis, right now, and there will be both winners and losers.  Those who take action – prudently, immediately – can protect themselves.  Those who lose are most likely going to be those who thought they were safe. 

Honestly, the situation is likely to be unfolding rapidly over the next few months, and anyone who claims to have all the answers is either misguided or misleading you.  As a professional I am closely monitoring the situation – and I want to hear from you.  What are your questions?  What do you want to know? 

Ask your question by posting a comment on this blog, and I will research and reply shortly on this blog.  Everyone needs to know the answers.

Cheers,
Pat

 

Say goodbye to 40-year mortgages!

ELLEN ROSEMAN 
The 40-year mortgage, launched just over two years ago, will probably expire in October.

Back in April 2006, Genworth Financial Canada was the first to insure residential mortgages in Ontario that were paid back over 40 years.

Soon, all of Canada’s mortgage insurers will have to underwrite mortgages paid back over 35 years at most. Ottawa is not killing the long-payback loan because it sees a U.S.-style housing bust coming to Canada.

Canadian financial institutions have been conservative in their lending, says a finance department background paper.

And subprime mortgages make up less than 5 per cent of new loans issued in recent years.

A more urgent reason is to protect taxpayers – you and me – from possible losses if too many stretched borrowers default on their 40-year mortgages.

The federal government is on the hook financially because it guarantees 100 per cent of the mortgage insurance claims paid by Canada Mortgage and Housing Corp., a Crown corporation.

It also stands behind the claims paid by CMHC’s private-sector rivals, such as Genworth.

Ottawa backstops 90 per cent of private mortgage insurers’ claims to make it possible for them to compete effectively with CMHC.

Mortgage insurance is a lucrative business. Residential buyers with less than a 20 per cent down payment must buy a policy, which protects lenders against default.

The average Canadian will pay only $55 a month more by taking out a 35-year mortgage instead of a 40-year loan, estimates Pascal Gauthier, an economist with TD Bank Financial Group.

“It’s just optics,” he says.

But other rules unveiled Wednesday could make it harder for first-time buyers to qualify for government-insured mortgages.

Borrowers will have to make a 5 per cent down payment instead of financing the entire house price.

They can still borrow the 5 per cent with a line of credit, but “it will not be insured under the new guarantee framework,” the finance department says.

Requiring buyers to put down 5 per cent of the purchase price in cash will have a bigger impact than the vanishing 40-year mortgage, says Jim Murphy, president of the Canadian Association of Accredited Mortgage Professionals.

Borrowers will also need a minimum credit score of 620 to qualify for a government-insured mortgage.

A credit score – also called a Beacon score or a FICO score (after Fair Isaac Corp. ) – is a numerical value that measures a borrower’s risk based on a statistical evaluation of information in their record.

The minimum credit score now used for government-insured mortgages is less than than 620, says a Toronto mortgage broker.

“The lender looks at all the circumstances, and getting a deal approved with a credit score of 580 has been pretty standard,” says John Cocomile of Greedy Mortgage. “This, of course, is assuming solid employment, a strong co-signer or other factors that make the deal sensible.”

Mortgage broker Jim Rawson, Toronto regional manager of Invis Inc., is glad to see tougher rules coming into force.

“It’s the right thing to do,” he says. “Our business won’t be affected that much.

“If you can’t afford to pay an extra $50 or $60 a month, you probably shouldn’t be buying a house.”

Bank of Canada urged to raise interest rates

The Canadian Press

July 10, 2008 at 4:04 PM EDT

OTTAWA — The Bank of Canada should move to head off inflation in the country by raising interest rates next week for the first time in a year, says a consensus view by a deeply divided panel of nine economists associated with the C.D. Howe Institute.

A closer look suggests the economic think tank’s monetary policy council was almost evenly divided 5-4 between those favouring a rate increase and those who thought the central bank should leave the rate unchanged.

Four members were in favour of the central bank leaving its overnight interest rate unchanged at 3.0 per cent next Tuesday, four others advocated a quarter-point increase and one wanted a half-point increase.

The overnight rate is a benchmark that is used by commercial banks when they set various other lending rates, including for shorter-term mortgages.

“Notwithstanding the division in opinion regarding the Bank of Canada’s July 15 decision, the main theme of the group’s discussion was concern about rising inflation and rising inflation expectations,” the institute said in a release.

“Several members argued that the Bank of Canada should act aggressively to prevent expectations of higher inflation becoming more pronounced and affecting price and wage setting.”

The economists cited high oil prices, the increased likelihood inflation will move above the upper end of the bank’s target range of one to three per cent, rising wages and a recent Bank of Canada business survey that found 42 per cent of firms planned to increase prices for their products.

The private-sector think thank said economists who favoured no action said they were concerned about the slumping economy, but even in this group, most saw the rate going to at least 3.25 per cent in the next six to 12 months.

The Bank of Canada uses monetary policy to keep inflation in check. Raising rates increases borrowing costs, thereby slowing down economic activity and growth.

The central bank began trimming the overnight rate from the then 4.5 per cent level in December as the economy began showing signs of slowing and perhaps contracting.

But after slicing 150 basis point from the overnight rate, following the lead of the United States, the Bank of Canada halted its easing policy last month, saying that inflation was beginning to re-emerge in Canada.

The bank last raised the overnight rate in July 2007.

Ottawa tightens mortgage rules to avoid 'bubble'

 

I just finished reading this on the Globe and Mail site. I am putting it here because I do not agree with it. Please feel free to send me your comments.

Thanks

Pat 

LORI MCLEOD AND KEVIN CARMICHAEL

From Thursday’s Globe and Mail

July 9, 2008 at 8:16 PM EDT

 

 

OTTAWA — The federal government is cracking down on the mortgage industry in a move that could help protect against a U.S.-style housing bubble, but will also make it tougher to borrow money to buy a home.

The Finance Department said Wednesday it will stop backing mortgages with amortization periods longer than 35 years as of Oct. 15.

It will also start demanding a down payment equal to at least 5 per cent of the home’s value, rather than guaranteeing mortgages where they buyer has borrowed the total amount.

“Today’s announcement marks a responsible and measured approach by the government to ensure Canada’s housing market remains strong, and to reduce the risk of a U.S.-style housing bubble developing in Canada,” the Finance Department said in a statement.

Existing 40-year mortgages will be grandfathered, a Finance Department spokesman said.

In 2006, the maximum amortization period was extended to 40 years from 25, and longer-term mortgage products have become increasingly popular with buyers looking for lower monthly payments as the price of Canadian homes soared.

Last year, 37 per cent of new mortgages were for terms of longer than 25 years, according to the Canadian Association of Accredited Mortgage Professionals (CAAMP).

But while longer amortizations stretch out monthly payments, they also greatly increase the cost of a mortgage over its lifetime.

For example, the total interest on a $300,000 mortgage can soar from $286,161 over the life of a 25-year mortgage to $498,416 over a 40-year amortization period – adding more than $200,000 to the cost of the home.

This, combined with the fact that these mortgages are often combined with little or no equity, raised alarm bells with policy makers looking at the turmoil that took place in the U.S. when house prices started to fall.

“We’ve seen an inclination now, a trend, toward longer-term amortizations and smaller down payments, and that is a matter of some concern,” Finance Minister Jim Flaherty said in a speech in May. Mr. Flaherty was not available for comment Wednesday.

Jim Murphy, president and chief executive of CAAMP, said in talks with him the government expressed concern about the risky lending products that collapsed the U.S. housing market.

The Finance Department was also worried about the future impact of competition between mortgage insurers, which led to the introduction of 40-year mortgage in 2006, Mr. Murphy said.

“I think you have a clear case of the government sitting down and looking at its risk exposure and wanting to review that. They have financial guarantees in place for the CMHC and private insurers, and they were saying, ‘What is our risk, and what is the risk to the Canadian taxpayer?’ ” he said.

Reaction from the industry was mixed.

“CMHC supports the new parameters … . We also support their efforts to maintain the strong Canadian housing market,” said spokesperson Stephanie Rubec, adding CMHC will stop insuring 40-year and zero down payment mortgages in October.

“It’s the right move,” said Nick Kyprianou, president of Home Capital Group Inc., whose principal subsidiary, Home Trust Co., provides alternative mortgages. “Why get people overextended? Nobody wins by getting people right to the end of the cliff.”

Others, however, say home buyers and banks have been prudent with their finances, and are being punished for the more lax approach south of the border.

“Things here are not like they are in the U.S. where they had those NINJA loans, no income, no job, no assets. … It’s only going to hurt the consumer,” said John Panagakos, owner of Toronto brokerage Mortgage Centre.

The move actually comes at a time when the housing market has moved on to other concerns, the most pressing of which is chilling consumer sentiment due to high fuel prices, said Douglas Porter, deputy chief economist at BMO Nesbitt Burns Inc.

“It’s a bit like closing the barn door after the horse has already run down the road.”

 

Why you will not see mortgage rates on this site!

At least two-dozen times a week we have people call us and ask, “What’s your rate on a 5 year fixed rate?” Most times when we try to get additional information from the potential borrower. Unfortunately, for both the caller, and us they don’t want to tell us anything. “I already know what I want, just give me a rate,” is the usual response.

Now, I’m not encouraging you not to shop-around for the best rate.

But, asking for a rate without giving more information is a bad idea. Why? Because frankly, anybody can give you any rate quote they want to over the phone, there is no way you can hold them to that rate. You see, there are two kinds of mortgage companies out there, those that are only interested in you as a loan customer and those that look at you as a client for life.

Those companies that want a fast buck know that they can quote you anything they want to just to get you in the door, then they can use whatever excuse to “convert” you to a different loan with a different rate.

Those companies that want you as a client for life, will take the time to ask for as much information as possible, up-front, so they can not only give you the best rate possible, but they can also quote you the best loan program for your situation.

Additionally, far too many people think they already know what loan program is best for them.

You may think you already know what you what, but unless you know all of the options in the marketplace you may miss an opportunity for a better loan program or situation that you didn’t know existed.

Let me ask you, have you ever gone into a store to buy a specific product, but came out with something entirely different?  If you did it was probably because you didn’t know the new product even existed or a knowledgeable person in the store gave your new information that helped you make a better decision.

That’s they job of a competent loan officer, to use their years of expertise to help you select the best option for your situation.

Please, don’t assume you know what’s best for you.

Now, I’m not saying that you shouldn’t make the final decision. After all, it is your money, your home and your financial future. However, there is no harm at all in letting a competent, well trained mortgage professional give you several options, then you select which you believe is best for you.

Cheers,

Pat